Testimony Of Ann Chaitovitz, Director Of Sound Recordings, AFTRACalifornia State Senate Hearings on Recording Artist Exemption to Seven Year Statute

By MusicDish [09-05-2001]

Ann Chaitovitz
Director of Sound Recordings
American Federation of Television and Radio Artists

Before the California State Senate
Select Committee on the Entertainment Industry
Hearings on Recording Artist Exemption to Seven Year Statute
(Labor Law Section 2855 (b))
September 5, 2001

INTRODUCTION

My name is Ann Chaitovitz, and I am the Director of Sound Recordings for the American Federation of Television and Radio Artists (AFTRA). The more than 80,000 performers and newspersons in AFTRA appreciate the opportunity you have given us to present this testimony on behalf of our recording singer members. These hearings are extremely important to all our members because Section 2855(b) singles out recording artists for disparate treatment and denies them the legal protections that California extends to all other workers. It is very appropriate that you are considering this law, which discriminates against one particular type of worker, during Labor Day week. Many of the best and most successful sound recordings are produced in California, benefiting both the state and national economies. In a society that treasures creative work, we must nurture the artists’ incentives to create. Not only does Section 2855(b) fail to accomplish this but it also denies recording artists the rights and nurturing granted to all others.

I attach statements of support urging repeal of Section 2855(b) from California Labor Federation, California State Theatrical Federation and Future of Music Coalition to my Testimony.

AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS

AFTRA is a national labor union representing over 80,000 performers, journalists and technicians employed in the news, entertainment, advertising, non-broadcast, digital programming and sound recording industries. More than 30,000 of AFTRA’s members are members of the Fresno, Los Angeles, Sacramento, San Diego and San Francisco Locals of AFTRA. Our national membership includes approximately 11,000 singers, rap artists, and other vocalists ("Singers"), as well as other artists, such as narrators and comedians, who perform on sound recordings. Many of these performers receive payments for the sale/distribution of each recording pursuant to a royalty contract ("Royalty Artists"). On behalf of the Singers and other performers that it represents, AFTRA negotiates the AFTRA National Code of Fair Practice for Sound Recordings (the "Sound Recordings Code"). Approximately 1200 record labels have signed the Sound Recordings Code, including all of the major labels. Pursuant to that Code, signatory record companies contribute amounts to the AFTRA Health and Retirement Funds which provides medical coverage and the promise of a pension to the Singers who perform on a recording. In addition to bargaining and administering the Sound Recordings Code, AFTRA also actively participates in all facets of public policy development affecting our membership, frequently pursuing national and international legislation and treaties that protect Singers’ rights, as well as joining issues in litigation that are critical to our memberships’ interests.

HISTORY OF SECTION 2855 (b)

Labor Code Section 2855(b) undermines the important rights most California employees enjoy under Section 2855 and was enacted in 1987 at the behest of the recording industry. AFTRA opposed that legislation then and supports repeal of that legislation now.

Labor Code Section 2855 was first enacted in 1937 as a modification of California’s longstanding rule limiting the period during which a personal service contract may be enforced by specific performance (dating back to 1872). Section 2855, as enacted, limits enforcement of personal service contracts, including contracts of "unique … extraordinary, or intellectual character", to seven years "from the commencement of service under it."

In 1987, the record industry launched a successful attack on the "seven year rule" as applied to recording artists. In that year subsection (b) was added to Section 2855, eviscerating the rule with respect to recording artists, and recording artists only. Subsection (b) requires recording artists, unlike any other employee rendering creative, intellectual or professional services under contract, to serve written notice of their intent to terminate a contract after seven years. And even more importantly, Subsection (b) subjects recording artists, unlike any other employee rendering creative, intellectual or professional services under contract, to lawsuits for damages alleged to flow from the artists’ failure to deliver services (i.e., phonorecords) during the term of the contract and without regard to California’s normal limitations period for breach-of-contract claims.

In 1987, the recording industry knew, but California’s Senators and Assemblypersons could not really have anticipated how the legislation would be used by the industry to enslave both the successful and the struggling recording artists AFTRA represents. You now have an opportunity to correct this injustice.

SINGER COMPENSATION and CONTRACTS

Many people harbor misconceptions about the music industry and how performers are paid. As the name implies, in addition to the small session fee required by the Sound Recordings Code, Royalty Artists receive a royalty for the sale or distribution of each recording but do not receive a fee for making an album. In fact, the Royalty Artist must pay for all of the production costs of the album, and typically pay 50% of the independent promotion costs, 50% of the costs of videos and 50-100% of tour costs. Artists often pay these costs with the help of an advance from the record company. However, artists must pay back their advances before they receive any royalty shares earned by their albums. This is called "recoupment." Taking into account all the deductions, royalty artists generally receive between $0.80 and $2.40 for each recording sold, depending on the level of success of the artist when the royalty contract is signed. What often is not understood is that the artist does not receive any of this royalty money until the recording company has recouped these costs.

It usually takes two or three years before even a successful artist receives his or her first royalty payment. As Sheryl Crow stated in a response to a question from Congresswoman Bono at a May 2000 U.S. House Judiciary Committee hearing, she did not receive any money until after her record had sold "three or four million copies." And, very few records ever sell this many units. As an example, in 1999, nearly 39,000 recordings were released, but only 3 singles and 135 albums -- 0.35% -- were certified as selling three million units, and notably, many of these records had been selling over a number of years before finally reaching the three million unit sales mark in 1999. The vast majority of royalty artists never receive a royalty payment.

Record contracts are unfair and oppressive to recording artists. Many new artists, who are often very young, enter one-sided, disadvantageous contracts with the record companies because of the unequal bargaining positions. In part because the value of the work is unknown when a new artist signs a contract with a record label, the royalty rate is low. Moreover, record contracts typically permit a one-sided renewal by the record companies for seven additional albums ("options") each to be delivered between 9 and 18 months from delivery of the previous album. In practice, however, the record companies generally want the artists to leave 2 years between delivering albums so he/she can tour to support the prior record. Thus, the record companies knowingly enter into contracts with artists which, by the terms of the contract, cannot be completed in seven years. Record companies often have the right to option at least six albums even from a mid-range artist and options for seven or eight albums are typical. What this means is that the artist is stuck -- if his/her record succeeds, the record company will exercise its option for additional albums at what has shown to be less than the free market rate; if the record does not succeed, the record company does not exercise its option and drops the artist. And, most often, the record company is not even obligated to release the record and is often able to hold an artist to the contract even if it does not release the record.

There have been a myriad of anti-trust issues raised about record company practices, and their use of oppressive, long-term contracts for recording artists at less than their free market value is a way for the record companies to stifle, impede, avoid, disrupt and circumvent the artists’ access to a truly free market.

Another offensive provision of recording artists’ contracts is the requirement that the artist transfer ownership in the sound recording to the record company. A very few artists are powerful enough to negotiate contracts providing that ownership of their sound recordings shall revert to them at some time in the future. New artists do not have the clout to negotiate such a provision and, thus, are required to transfer ownership of their sound recordings to the record label. This is true although the artist actually pays to produce the sound recording, with the record company acting like a mortgage bank which provides a loan to the performer to finance the recording in the form of an "advance." That advance is "recouped" by a record label when it deducts the advance from royalty payments owed to an artist for sales of that recording. However, unlike a bank which grants a mortgage to a homebuyer, the record company maintains ownership of the work even after the artist has "paid back" the advance. Imagine the absurdity of the bank still owning your house after you have paid off the mortgage!

With the recent label consolidation, artists who are working under these long-term, onerous contracts are often "sold" to a new label as part of a merger or consolidation between labels. Sometimes, they are sold to a new label they had specifically rejected before. AFTRA receives calls from artists who signed with a union label (i.e., one that had signed the AFTRA Code) to ensure their health and retirement coverage only to subsequently learn they have had their contracts sold to a new label which had not signed the AFTRA Code, so their new work would not provide them health coverage or retirement benefits.

SECTION 2855 (b) MUST BE REPEALED

The fact that Section 2855(b) singles out recording artists for disparate treatment, robbing these artists of protections Section 2855 affords to all other California artists, intellectuals and professionals, in itself presents a compelling case for the repeal of this misguided legislation. Closer examination of the arguments the recording industry relied on to pass this legislation in the first place, and of the nefarious purposes to which the recording industry has put this legislation, provides an overwhelming case for the repeal of Labor Code subsection 2855(b).

The recording industry presented two main arguments when lobbying for the passage of 2855(b). First, the industry argued that record labels are required to make substantial pre-production investments, mainly in the forms of artists’ monetary advances and promotional campaigns, to bring successful records to market and that the industry often does not recoup these investments and begin to turn a profit on the artist’s work until the recording artist has produced a number of recordings. In essence, the industry argued, record labels had to have the ability to sue recording artists for unproduced records in order to compel recording artists to produce the requisite number of records, even if that meant that the recording artist was compelled to remain under a personal service contract more than seven years. The record industry designed 2855(b) to void the seven-year limitation of 2855 and replace it, for recording artists only, with a limitation measured by the number of recordings delivered to the record label.

Contrary to the record industry arguments, there is nothing unique about the pre-production costs associated with the phonorecord industry. Artists working in other fields, such as film and literature, also often require substantial advances, investment and promotion of the artist over the course of several years and several projects before the artist achieves a level of success that generates profits for the employing company. Yet artists in all other fields -- save the record industry -- continue to enjoy the full protection of the seven year rule. The record companies are in a better position than employers in these other industries and need this exemption even less -- after all, unlike employees in other industries, recording artists are almost universally required to pay the costs to make and promote the record.

Furthermore, the record industry’s argument minimized the substantial control the record companies can and do exercise over the negotiation of recording artist contracts. Record companies can and do control the out-front capital they spend on record projects. Record companies can and do charge artists directly for the costs of promotional activities. Moreover, record companies could structure their contracts to provide them with fewer "options" for albums or in terms of years and not albums.

The industry’s second argument bolstering its lobbying effort for 2855(b) was that 2855 (before the addition of subsection (b)) permitted a recording artist to walk away from a recording contract seven years after that contract commences, regardless of whether the artist has fulfilled his/her contractual obligation to produce a specified number of records. What the record industry failed to acknowledge was the extent to which the recording industry insists upon an unrealistic quota of records in almost every recording artist contract. This quota, combined with the threat of a damages lawsuit under 2855(b), invariably locks recording artists into personal services contracts for longer than seven years. Because a damages lawsuit brought after the artist has invoked the seven-year rule will most likely wipe out all earnings the artist might receive under any subsequent recording contract, recording artists simply cannot risk utilizing the protection of 2855(a).

The recording artist who enters into a contract to produce a specified number of records is no different than a film artist who enters into a contract to act in a specified number of films or a novelist or screenwriter who enters into a contract to write a certain number of novels or scripts. These latter are a normal feature of the motion picture industry, particularly with the popularity of sequels, and of multi-book contracts in publishing. Yet because of 2855(b) it is only the recording artist who faces the threat of a damages lawsuit seven years into the contract if the artist invokes the traditional seven-year rule all artists enjoy to terminate the personal service contract.

2855(b) gives the record industry multiple weapons to compel the recording artist to remain under contract with one label even after seven years. 2855(b)(2) permits the record company to bring a breach of contract suit during the term of the contract, or after its expiration, within four years of the alleged breach. Four years is the normal California limitations period for a breach of contract claim, but 2855(a) prohibits damages for breach of personal service contracts after seven years for all other Californians.

Separate and apart from this threat, 2855(b)(3) permits the record company, within 45 days of the artist’s termination of the contract pursuant to 2855(a), to bring a damages lawsuit with respect to any record the artist has allegedly failed to produce, even if the record at issue was due more than four years earlier. This provision of 2855(b) thus carves out for the recording industry a unique exception to California’s traditional four-year statue of limitations for breach-of-contract claims. Importantly, it even permits damages for records which would be due under unexercised options.

The right to contract is not absolute and is often limited. The U.S. Congress’ consideration of this very issue provides guidance here. After thorough debate, Congress made a policy decision to provide termination rights to creators to "safeguard authors against unremunerative transfers. A provision … [was created] because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work’s value until it has been exploited." The creators of all copyrighted works enjoy termination rights, a right to regain ownership of your work, after 35 years.

Congress thus limited contractual rights and granted termination rights regardless of what the applicable contract transferring the copyrighted work provided (e.g., for a transfer of copyright in perpetuity, 50 years, forever, including any renewal period). California limits personal service contracts to seven years for everyone except those who need it most -- those whose works’ value is unascertainable until after exploited.

AFTRA urges the repeal of 2855(b). Recording artists are an important component of AFTRA and California’s successful record industry, and they are entitled to the same protections that California artists engaged in other fields already enjoy. 2855(a) contains important rights that ought to be restored to recording artists. Without the full protection of 2855(a), successful recording artists are deprived of the full leverage their success should generate seven years into a contract when record companies ensure that artists are precluded from shopping their talent on the open market. All recording artists need the protections 2855(a) offers to artists in every other field of endeavor – and now is the time to restore those rights to California’s recording artists by repealing subsection 2855(b).

Again, AFTRA appreciates the opportunity to testify on behalf of recording singers and looks forward to working with the Committee and its staff to repeal this onerous and unfair exemption to Section 2855.